A dictionary defines risk as the possibility of loss or injury. But, like many things in life, risk is in the eye of the beholder. When it comes to investing, people tend to have different points of view about risk. Many investors see risk as the possibility of loss of investment principal.

But investment managers, like the professionals who manage mutual funds, know that only those people who sell their investments when prices have dropped lose money. These managers view risk as a combination of technical measurements, such as standard deviation, beta, and alpha. They use these measurements as tools in their ongoing assessment and management of the risk in portfolios. In other words, mutual fund managers see risk not as loss but as fluctuation in the value of investments.


Professional financial advisors, on the other hand, generally relate risk to the risk/reward tradeoff discussed in step four of this brochure. And the risk that is often forgotten is inflation risk–the possibility that higher prices will rob a nest egg of its future value.

Risk is part of life. Everything we do–or don’t do– entails risk. While some of life’s risks are large, even life threatening, others are hardly noticeable. We first learned about risks from our parents. They taught us, for example, about the dangers of sharp objects, hot things, and electrical sockets. Some of us listened; others learned the hard way. As we grew older, we learned from others and from our own experience to manage risk, and over time our risk management skills became second nature–like looking both ways before crossing the street.

We take risks because the rewards justify them. Driving on the highway is a risk, but most of us consider that the paycheck, or people, or some other rewarding experience at the end of the ride is worth the chance. By the time most people reach early adulthood they have highly developed skills to identify, understand, and successfully manage risk in their everyday lives.

But when it comes to investments, many people feel their risk management skills do not apply. This booklet shows that they do. It demonstrates how, in dealing with investment risk, you can use the same process that you have used successfully to understand and manage the wide range of risks in life

Related posts:

1. Risk Management
2. Make Your Decision
3. Evaluate the Risk/Reward Tradeoff
4. Identify Risks
5. Understand Risks
6. Evaluate the Risk/Reward Tradeoff
7. The risk of investing in the Stock Market
8. Every investment is fraught with investment risk
9. The risk of being a value investor
10. It is very important to differentiate between risk and danger